One of the most rewarding aspects of my job as an executive financial advisor is ultimately helping my clients positively impact other people’s lives. As a top-level executive, you likely have many direct reports whom you affect each day when you go to work. However, when you can reach outside of your daily sphere of people and positively affect those who need support most, your impact extends beyond what you could imagine.
The majority of the executives I work with want to make this type of positive impact in the world by donating to charities. However, many aren’t exactly sure the best way to do so.
As an example, one of my clients knew that he wanted to make a charitable donation with his appreciated stock. However, he wasn’t exactly sure how or to which charity to donate to. At the end of the day, we were able to determine that donating stock directly to the charity rather than selling it first would be most beneficial because it would eliminate the need to pay a capital gains tax (which would have been sizable due to the stock appreciation). This also allowed my client to simultaneously earn a charitable tax deduction for the donation.
By utilizing a donor-advised fund, the client was able to deposit the stock into the fund and earn a charitable tax deduction for that year while waiting to actually donate the money until he could pinpoint the exact charity that best aligned with his goals. A donor-advised fund can be a powerful charitable planning tool for executives. Here’s a closer look at these tools and how you can earn a donor-advised fund tax deduction.
What Is a Donor-Advised Fund?
A donor-advised fund (DAF) is one of the most effective charitable giving strategies for executives. It is also just like it sounds—a fund in which you can place assets to be advised by you (the donor) to where you want them to go. The DAF is set up and established by you, with the help of your financial advisor.
A couple of the main benefits when it comes to utilizing a DAF in your planning is being able to take a tax deduction for a charitable donation when you place funds in your DAF, even if the money doesn’t go to a charity in the same year. In fact, you have the flexibility to hold the donations in the account for as long as you see fit.
As an added bonus, the funds that are held inside the account have the opportunity to grow, depending on your investment strategy, until you decide exactly when and where you want to donate the assets.
How to Receive a Donor-Advised Fund Tax Deduction
When you are planning your legacy using charitable gifting strategies, one of the perks that come along with helping people is the tax deduction. While this is never the driving factor behind donating to charity, it is a benefit that can’t be overlooked. In the case of using a donor-advised fund for charitable gifting, it is no different.
To earn a donor-advised fund tax deduction, these are the general steps you will follow:
- Set up your DAF. It is best to work with a financial advisor who can help you originate the fund and determine what investments make the most sense inside the fund.
- Place the funds you wish to donate into the DAF you have established. You can donate cash, stocks, real estate, private business interests, or private company stock. You can accomplish this by titling the assets to be owned by the fund or selling the assets and then depositing the cash into the fund.
- Claim your tax deduction. At this point, you will have generated a tax deduction to be used in the same year. You will be sent an annual DAF statement to provide to your tax professional to claim your tax deduction.
- Identify the charity you wish to donate to. Your funds can remain in your DAF until you identify a charity you’d like to donate them to. When identifying an organization, make sure the charity or charities are registered as a charitable organization or non-profit organization. If the charity fails to meet this criterion, you will forfeit your tax deduction and potentially owe money to the IRS if you have already used the deduction.
- Donate the funds. To transfer the donation from the DAF to the charitable organization, you can simply write a check from the fund or transfer the assets in kind from the fund to the charity if it wishes to hold or sell the assets itself.
These may sound like simple steps, and they can be. However, it is still helpful to work with an experienced wealth manager to establish your DAF and execute your donation. A DAF is a great tool to use to obtain a tax deduction, but your unique situation may lend itself to a different charitable giving strategy that is more effective for you. Unless you take the time to sit down with an advisor to determine the best strategy for your situation, this could be overlooked.
Achieving Charitable Gifting Goals With a Donor-Advised Fund
A donor-advised fund tax deduction is earned first and foremost through hard work as a top-level executive. You must first earn the income or assets before you can donate them. Eventually, though, those assets tend to accumulate and can turn into a large tax burden, especially in the case of appreciated stock or other appreciated assets.
When you feel that charitable inclination tugging at your heart but aren’t exactly sure of the ultimate purpose you want your donation to play, taking a donor-advised fund tax deduction now for a donation that you will make in the future is one of the most effective ways to remove large appreciated assets from your portfolio. Earning the assets is the hard part, taking a tax deduction through a donor-advised fund is the easy part (when you work with the right advisor), and finally, donating to a charity you believe in is the fun part.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for estate planning and charitable gifts planning for executives. For more information on how Wade and the Carpenter Team can advise you on earning a donor-advised fund tax deduction, reach out today for a complimentary consultation.
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